BRUSSELS, March 5 (Reuters) - The European Commission put
Italy on Wednesday on its watch list because of the country's
very high public debt and weak competitiveness and warned France
that will miss agreed budget deficit reduction targets unless it
takes action.

The Commission, the European Union's executive arm,
conducted in-depth reviews of the economies of 17 EU countries
that it believes have macro economic imbalances.

Under EU rules, if such imbalances are considered excessive,
a country has to take action under the European Commission's
surveillance to address them or risk a fine.

The Commission said that Belgium, Bulgaria, Germany,
Ireland, Spain, France, Croatia, Italy, Hungary, the
Netherlands, Slovenia, Finland, Sweden, and the United Kingdom
all had imbalances in their economies.

But they were excessive in Croatia, Italy and Slovenia. This
means the Commission will now monitor their economies closely,
making sure they implement reforms recommended by EU finance
ministers.

"Italy has to address the very high level of public debt and
weak external competitiveness; both are ultimately rooted in the
protracted sluggish productivity growth and demand urgent policy
attention," the Commission said.

"The need for decisive action to reduce the risk of adverse
effects on the functioning of the Italian economy and of the
euro area, is particularly important given the size of the
Italian economy," it said.

But it added that reaching and sustaining very high primary
budget surpluses and economic growth for a long time, needed to
bring down debt, would be a major challenge.

FRANCE, ITALY MUST DO MORE

So far, Rome's efforts were not enough, the Commission said.

"The adjustment of the structural balance in 2014 as
currently forecast appears insufficient given the need to reduce
the very large public debt ratio at an adequate pace," the
Commission said.

Italy's economy ministry said in reaction that reforms it
has promised are in line with the Commission's statement, adding
that for the past two years, Italy has concentrated on
stabilising public finances and has been rewarded with a sharp
reduction in borrowing costs.

The country's new Prime Minister Matteo Renzi pledged on
Wednesday to introduce a series of "very important reforms" next
week to help create jobs, make housing more affordable and
remodel crumbling school buildings.

France, which last year was given two extra years to bring
its budget deficit below the EU ceiling of 3 percent of GDP, was
not delivering on its consolidation promises either.

"France is projected to miss both headline deficit and
structural adjustment targets over the entire forecast period,"
the Commission said.

French ability to compete on the global markets was also
weak, the Commission said.

"Despite measures taken to foster competitiveness, so far
there is limited evidence of rebalancing. While wages have
developed in line with productivity, the labour cost remains
high and weighs on firms' profit margins," the Commission said.

"The unfavourable business environment, and in particular
the low level of competition in services, further aggravate the
competitiveness challenge. In addition, rigidities in the wage
setting system result in difficulties for firms to adjust wages
to productivity," it said.

France, responding to the Brussels report, said it would
pursue cleaning up of public finances right through to the end
of its current term in 2017, with the bulk of efforts to rein in
public spending slated for the 2015-2017 period.

Finance Minister Pierre Moscovici said in a statement that
reforms were underway or in the pipeline to improve French
competitiveness.

Germany's very high current account surplus was an
imbalance, the Commission said, but not worrying enough to put
Berlin on the imbalances watch list, because it was likely to
diminish over time as domestic demand in Germany rises.

Germany has had a current account surplus in excess of 6
percent of its gross domestic product since 2007, meaning it
exports far more than it imports from the rest of the world.

"In the case of Germany, the surplus has been receding
vis-à-vis the euro area since the onset of the crisis and a
gradual correction of the current account is expected to take
place over the coming years on the back of a stronger
contribution to growth from domestic demand," the Commission
said.

Berlin should aim to boost investment and labour supply and
liberalise its services sector, the EU executive said.

Spain, which was put on the imbalances watch list last year,
was now taken off, even though risks remained.

"In the case of Spain... the Commission considers that a
significant adjustment has taken place over the last year and
that on current trends imbalances would continue to abate over
time," the Commission said.

"While this is the basis to conclude that imbalances in
Spain are no longer excessive, the Commission stresses that
risks are still present," it said.